The insurance department, in order to make it an incentive for them to write business in some of these areas, tells them, Look, you write one voluntarily; we will subtract two from your assignments at the New York Automobile Insurance Plan. The superintendent thought this was going to be the panacea, this was going to be great, we are going to depopulate the plan.

By the way, the plan in New York has over 1 million, 1 million automobiles. And it is growing.

There were no takers in this plan, no takers. So they figured something has to be done. So they came up with this idea, because the service that some of these carriers give the insurers is absolutely awful. You can't get through on the phone.

Can you imagine companies where you can't get through on the phone? What they did was they said, "We are going to form a thing called the lead plan." The lead plan means that a company that has given many assignments can sell those assignments to somebody else. The going rate was 125 percent of the premium. In other words, they were willing to accept a 25-percent loss on every one just to get rid of it.

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And there was a company that bought them. Two companies that bought them, in fact. One of them is the Robert plan, who is eminently successful doing this, and the other one was Empire. They bought them, they handled them, they are making money and everybody is very happy, and these other major carriers are not involved in any way. They are turning it over.

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The Robert plan has now 70 companies that they have taken all their assignments. So these companies have completely washed their hands of all the assigned risk business.

Now, the carriers, the insurance companies, will tell you that they don't discriminate, it is a matter of profitability. They want to make a profit. They are in business to make a profit. It just so happens that in black and Hispanic areas, they are losing money. That is accidental. But it just happens that way.

Now, I believe that the top of these companies, they actually believe this. I really think they believe it. But as it goes down to the underwriters, I don't think it goes that way. I think there is really true discrimination.

I have been told, not once but many, many times in my 30 years in this business that we prefer not to write blacks and Hispanics. Now, in some companies this carries over not only to the ghetto areas, but to some of the so-called better areas. They just don't want them. They want no part of it.

Let me touch quickly on the FAIR plan. We have a FAIR plan in New York that is absolutely great. They make money constantly.

Chairman KENNEDY. I really want to hear from you. You are a wonderful witness. I feel badly because I think we have already cut our other witnesses off. I have asked people to try to limit their comments to 5 minutes. Why don't you just try to wrap it up.

Mr. CARBAJAL. I just want to tell you we have a great FAIR plan, it works, because they have the proper people running it, and that all the major carriers do not sell off as the others have. For example, the major carriers, some of the real big ones, the Aetnas and the All States, State Farm, and so on, they handle their own. However, they give this to their worst people. In other words, the worst

employees that they have, those are the ones they give. Any time they find a good employee that is working for the New York Automobile Insurance Plan, they promote him out.

So we are on the losing end. This hearing can do a great deal to change all this, because just the mere publicity is likely to embarrass these people into doing something about it.

[The prepared statement of Mr. Carbajal can be found in the appendix.]

Chairman KENNEDY. Let's hope you are right. We really appreciate your testimony today.

I would like to now introduce Rev. Charles Cummings, the treasurer of the District of Columbia chapter of ACORN, and an active member of ACORN for over 5 years.

ACORN, the Association for Community Organizations for Reform Now, has chapters in 35 cities and has a long history of promoting bank reinvestment in neighborhoods. He will testify on the results of a new study today.

Reverend Cummings is accompanied by Deepak Bhargava, the legislative director for ACORN.

Please proceed, Reverend Cummings, and try to keep in mind the 5-minute limitation. Thank you very much.

STATEMENT OF REV. CHARLES CUMMINGS, JR., TREASURER,
DC CHAPTER, ACORN,

ACCOMPANIED

BHARGAVA, LEGISLATIVE DIRECTOR, ACORN

Reverend CUMMINGS. Thank you.

BY

DEEPAK

Good afternoon, Mr. Chairman, and members of the subcommittee. I am Rev. Charles Cummings, Jr., treasurer of the Washington, DC chapter of ACORN. I appreciate the opportunity to present testimony before you today on the important subject of insurance redlining.

ACORN has just recently completed a study of insurance redlining in 14 cities. The study reveals severe problems in the extent, quality, and price of coverage in low-income and minority communities.

I appreciate your prompt response to the recent release of this study, and commend you for holding these hearings. I would also like to commend Chairman Kennedy for your consistent record of leadership on behalf of working families.

The results of our study are alarming. The four principal findings of our study were that low-income minority areas were significantly underinsured by conventional and residual markets by as much as 48 to 50 percent in Chicago, and St. Louis, Missouri, for example, and minority areas were underinsured compared to the white areas of comparable income.

A wide range of obstacles were used by agents to avoid doing business in low-income and minority areas. Testers from these neighborhoods were not even offered quotes on policies in 38 percent of the tests conducted.

Testers were often simply told that "we don't write policies in that neighborhood" or that "we don't cover houses worth less than a certain value."

The policies that were offered and written in low-income and minority areas were often of a substandard quality. Residents of these

neighborhoods were more likely to be offered FAIR plans or offered limited market value coverage.

On average, in our study, callers from low-income areas were quoted premiums 2.5 times higher per $1,000 of coverage than were testers from upper income areas.

Twenty-five years after the Hughes Presidential Commission identified insurance availability as a central obstacle to urban economic development, insurance redlining remains a pervasive problem in low-income and minority communities.

Various studies by academics and government have found patterns similar to those revealed in ACORN's study. They have demonstrated that there is a major problem of insurance availability and affordability in minority and low-income areas.

Unfortunately, FAIR plans, shared risk pools for high-risk policyholders created in the 1970's, have not solved the problem. Numerous studies have argued that FAIR plans have in fact become dumping grounds for whole neighborhoods.

Our preliminary analysis of the claim data suggests that people on FAIR plans may not be more likely to have claims than other policyholders, offering less coverage at higher rates. FAIR plans have become a form of institutionalized redlining.

The heart of the problem, however, lies in the conventional market, and with the practice of insurance companies. These problems appear to have resisted change for a quarter of a century.

Insurance redlining is both blatant and subtle. Blatant forms are fairly straightforward, despite State antiredlining statutes.

An insurer can still usually refuse to insure someone based on area in which they live. An insurer can also redline by offering prohibitory rates; that is, offer an unreasonable quote that is well beyond the ability of a policy seeker to afford.

Finally, an insurer can use underwriting criteria that clearly redline whole areas of classes of people.

For example, if a company refused to insure based on the age or value of the dwelling, that may have the effect of excluding all minority neighborhoods in a city. Redlining may also take the form of higher prices or a lower level of coverage; differences that may not be based on any concrete risk analysis.

While individuals who are not redlined out of the conventional or residual market may remain without insurance, others turn to scavenger companies, surplus line carriers. These unregulated offshore companies also offer high rates and are not covered by State guarantee funds. When the time comes for a big claim, these companies may turn out to be nothing more than a P.O. Box, and leave the policyholder high and dry.

This, I am sure, is familiar to you, Mr. Chairman. After your recent investigation into the problem of second mortgage scams, insurance redlining has a devastating cost for individuals, neighborhoods, and society. The development of thriving neighborhoods with the expanding opportunities for home ownership and entrepreneurship hinge on the availability of credit and insurance.

Mortgage lenders will often not make loans without insurance. No insurance means no loans. And inner city small business cannot hope to compete with its suburban counterparts if its insurance costs twice as much.

Without adequate and competitive insurance, enterprise zones will not alone lead to increased job opportunities in our communities. The problem of insurance redlining is compounded by an ineffective State regulatory apparatus. that is unwilling or unable adequately to protect consumers.

The Federal Government can and must take a protective role to end insurance redlining. For decades bankers denied charges of redlining until Congress passed the Home Mortgage Disclosure Act, HMDA, and improved it with amendments which you sponsored, Mr. Chairman.

Congress should pass similar disclosure legislation for insurance companies. That disclosure should include disclosure of homeowners' policies written by companies on a census tract basis, and by the race of the applicant.

The Justice Department and HUD should also apply the Fair Housing Acts to insurance companies and investigate for discrimination.

Community groups have an obligation to contribute to the solutions. ACORN is trying to work directly with the insurance companies to underwrite the risk fairly, and to educate consumers. ACORN hopes to develop a neighborhood home safety program to reduce risk in our neighborhoods and thereby to improve the affordability of insurance in our communities.

The crisis of insurance availability is too important for the Federal Government to continue to ignore. Insurance is a necessity for urban economic development. In the words of the Hughes Commission, a quarter century ago, "Communities without insurance are communities without hope.

Thank you, Mr. Chairman. That concludes my testimony.

[The prepared statement of Reverend Cummings can be found in the appendix.]

Chairman KENNEDY. Thank you, Reverend Cummings. We appreciate your testimony and the hard work that ACORN has done, which has brought to light a lot of the problems that exist for poor communities with regard to insurance. I thank you and all the hard-working folks associated with your organization.

I would now like to introduce Prof. Gregory Squires, who is a professor of sociology and a member of the Urban Studies Program and faculty at the University of Wisconsin-Milwaukee. Prior to joining the faculty, he served as a research analyst for the U.S. Commission on Civil Rights.

His main research interests are the racial effects of urban development, focusing on economic development policy. He has written a number of articles on insurance redlining.

Please proceed with your testimony.

STATEMENT OF GREGORY SQUIRES, PROFESSOR, UNIVERSITY
OF WISCONSIN-MILWAUKEE

Mr. SQUIRES. Thank you. I appreciate the invitation to be able to participate in this discussion today.

I want to pick up on the comment that Reverend Cummings has made that 25 years ago a Federal panel concluded that communities without insurance are communities without hope. That statement could be just as easily written today as 25 years ago.

Neighborhoods containing large numbers of minority residents are discriminated against in the provision of insurance. This is a systematic reality. It is not just anecdotal experience. Intentional racial discrimination has continued. The fact is that industry practices have an adverse effect on minorities and perpetuate discrimination.

In research that I conducted with the U.S. Commission on Civil Rights in Chicago and I have done in the city of Milwaukee as a faculty member at the University of Wisconsin-Milwaukee, we have found that racial composition of neighborhoods is more highly associated with the number of insurance policies written in neighborhoods than the number of owner-occupied housing units, the income of residents, the poverty rate, the age or condition of housing, the population turnover, the crime rate, the incidence of fire, and other factors presumably associated with risk.

More importantly, the association between race and insurance provision remains even after you control for all these other riskrelated factors.

There is a racial gap in the provision of insurance in the United States that cannot be explained away by income, economics, or risk. The question is why.

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Part of the answer may be profitability. Insurance agents will say that they can make more money writing highly valued properties or homes which happen to be located in predominantly white suburban communities. To me this simply begs the question of whether profit maximization for some should be used as a justification for the devastation of the neighborhoods of many.

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I don't accept the concept that insurance cannot be profitably written in these neighborhoods, but we have to consider alternative mechanisms for delivering this essential service, whether it be municipal insurance programs, publicly regulated utilities, or some other approach. It seems to me if it cannot be profitably written, we have to think of ways of making the service available.

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But unfortunately, the issue is even more complex. The perpetuation of racial stereotypes continues to affect the provision of services.

Let me read you one statement from 1988, by the sales manager of an insurance company. They very conveniently put it in writing in a memo. This is from the manager to several agents. I quote: "Your persistency went down the shitter. Very honestly, I think you write too many Blacks. You have got to sell good, solid, premium-paying white people. They own their homes. The white works. Very honestly, black people will buy anything that looks good right now but when it comes to pay for it next time, you are not going to get your money out of them. The only way you are going to correct your persistency is to get away from Blacks.

This has led some of us in the State of Wisconsin to think that maybe race has something to do with the provision of insurance in this country.

There are some practices that may have some legitimate business purposes that are not intentionally discriminatory but have that effect nevertheless. Many companies will not provide coverage on homes valued at less than $25,000 or $30,000. Given the realities of residential discrimination in the United States, we know